Will States and Localities Keep Opting for Higher Fees?

In the years during and after the Great Recession, governments have been turning more toward raising fees, according to a recent report.

In tight fiscal times for governments, raising taxes to close budget holes is a surefire way to rile up cash-strapped constituents. So in the years during and after the Great Recession, governments have been turning more toward raising fees, according to a recent report by the Federal Funds Information for States.

Fees as a percentage of state and local revenue have increased to 20.7 percent of income in 2010, up from 19.2 percent in 2008, according to the report. The report uses U.S. Census Bureau data from 2010 and includes localities, which tend to rely more on fees than their state, in each state’s data. The income is from state and local sources, with no contributions from the federal government.

“It’s definitely been a trend right now and it makes sense given the fairly lackluster growth at the state level,” Scott Pattison, executive director of the National Association of State Budget Officers told Governing.

“As the economy gets better, you’ll see income improvements in income and sales taxes,” he said. “Fees are something that are turned to more in bad times because it’s politically easier to do.”

But states that drift toward the extremes – that have relied more on fees or taxes in the past – the budget crafting becomes a little trickier.

Among the 50 states and the District of Columbia, South Carolina’s own-source income shows the heaviest reliance on fees, with charges making up 36.7 percent of its earnings. Meanwhile, it has the nation’s lowest reliance on taxes, which make up 51.6 percent of its income.

Much of that is due to the state’s budget philosophy, said Les Boles, director of that state’s Budget and Control Board.

“We’re a very conservative state and we don’t raise taxes,” he said, adding that the “biggest” tax increase most recently came when the cigarette tax was raised from 7 cents to 50 cents. And last year, South Carolina even cut some individual income tax rates for small business.

But even though the state may have at least temporarily reached its limit with raising fees, the state is more likely to make cuts than raise taxes to balance its budget.

“It’s been more difficult over the last year as fees have gone up,” Boles said, adding, “there’s even more scrutiny. We have a balanced budget every year so we look closely at setting priorities and balancing the budget that way. But we don’t do any indiscriminate cutting.”

On the opposite side of the spectrum is the District of Columbia, which records the lowest reliance on fees with the charges making up 7.3 percent of the jurisdiction’s income.The District is second only to Connecticut for its reliance on taxes, which make up 78.5 percent of the city’s local revenue.

Fitzroy Lee, deputy chief financial officer for the District, said the city’s heavy tax reliance comes in part because it can apply higher levies to areas that target visitors, businesses and commuters rather than the city’s more than 600,000 residents. For example, the District increased its sales tax during the recession, Lee said.

“Whereas fees are going to be paid pretty much by the residents,” the District has the luxury of exporting some of its taxes to the additional 600,000 people who enter the jurisdiction each day to go to work, he said.

But like its neighbor to the south, the District is finding that it must ease up on that reliance. Earlier this year, the District instituted a Tax Revision Commission to review the current tax code and make recommendations for the future.

Indeed, the last budget passed by the council did not include new taxes but it did include a plan for more traffic cameras across the District, an effort that would raise the fee revenue for the city.

“We have to remain competitive,” Lee said. “We don’t know how much of the fiscal cliff … we’ll be able to manage through higher revenues on commercial or sales tax. There is a limit to how much we can do with that.”